Virtual vertical integration is the future of supply chain

9 May 2013

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9 May 2013 | Paul Snell

The future of the supply chain is “virtual vertical integration”, and the companies that get it right will be the ones that “rock this world” according to the CPO of Flextronics.

In a presentation to the Institute for Supply Management annual conference, chief procurement and supply chain officer Tom Linton explained companies that were previously vertically integrated are now 'virtually vertically integrated' (VVI). He described this virtual integration as the “managed alignment of external supply chain capabilities that leverages multiple levels of those capabilities to improve profitability and cash flow”, where the suppliers are seen as an extended enterprise that behaves as if internal to the company.

Companies involved in this type of supply chain are in one of four tiers. At the top there is the brand level, companies such as Apple, who are focused on R&D and marketing but don't own factories. The second tier is the 'integration' level, which assembles things to create a product, such as Linton's own firm Flextronics. Below that is the 'device' level where parts come together, in the electronics industry for instance semi-conductors or chips. And the fourth tier is the raw material level.

“Companies that actually get a handle on this kind of supply chain, I believe in the next decade will be the ones that are going to rock this world. The companies that do this are going to be transformational, just like Apple was. We now have the technology and tools to do this. You couldn't do this a decade ago,” he said.

He likened it to the structure of a sports team. There is an owner who hires the coach (the integration tier), and controls him and tells him what to do. The coach then hires the players (the device level).

Linton said there are five requirements to make VVI work. The first, and foremost, is transparency between the tiers. “Transparency is difficult. It is one of the things we have to get over. We have to have it, because it defeats complexity and minimises risk.”

He outlined the need to leverage the tiers, making sure you consolidate to have as few as possible in the chain. “There needs to be integrity. You need reliability. And it also needs to be fast. Speed wins, if you are not fast and don't have a lean supply chain, you don't have a chance,” Linton added.

“Today's best practice in supply chain is virtual and multi-tier. It is global in scale and footprint. It's fast. It's cost efficient. It's responsive and it's reliable and simple. As complex as some of this sounds. It's about fundamentally looking at the multiple tiers of your supply chain and figuring out how to connect it in a way that gives you greater control and therefore your financials have greater results, whether it be cash, operating profit or revenue growth,” he concluded.

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